Jurisdiction - Indonesia
Banking & Finance
Hiswara Bunjamin & Tandjung

13 January, 2013

 

 

Bank Indonesia (“BI“), the Indonesian central bank, has now been published its long awaited amendment to the so-called Single Presence Policy which has been in place since 2006 and which in principle limits any bank controller to one banking operation in Indonesia, subject to certain exceptions. The main underlying reason for this amendment is to introduce more flexibility to this policy, by introducing among other things the option of creating a Bank Holding Company whereby a controlling shareholder controls more than one bank in Indonesia, as an alternative to requiring the controlling shareholder to merge the banks under its control. It remains to be seen whether this additional flexibility will facilitate BI’s long term goal of encouraging 

further consolidation in the Indonesian banking sector.

 

BI’s Single Presence Policy was previously contained in BI Regulation No.8/16/PBI/2006 (“2006 Regulation”). BI has recently published BI Regulation No.14/24/PBI/2012 (“2012 Regulation”), which took effect on 26 December 2012. The 2012 Regulation amends certain aspects of the 2006 Regulation. The 2006 Regulation itself is now no longer valid. The 2012 Regulation will be further supplemented by BI implementing circulars (which have yet to be published).

 

The key principles in the 2012 Regulation are as follows:

 

1. Single Presence

 

  • Each party can only be the Controlling Shareholder of one bank. Controlling Shareholder is defined as a legal entity and/or individual and/or a group of businesses which:
    • (a) owns 25% or more of the total issued voting shares in a bank;
    • (b) owns less than 25% of the total issued voting shares in a bank, but is proven to have control of the bank whether directly or indirectly.

 

2. Exemptions

 

  • This requirement does not apply in relation to:
    • (a) the Controlling Shareholder of two banks, where one of the bank is a conventional bank and the other bank is a syariah bank; or
    • (b) the Controlling Shareholder of two banks, where one of the banks is a Joint Venture Bank (“Bank Campuran”).

 

For this purpose, a Joint Venture Bank is defined as a bank which is set up and owned by a foreign bank and a local bank in Indonesia, which has obtained its banking licence before Law No.10/1998 (which amends Law No.7/1992 on Banking) took effect, and for which on 26 December 2012 (i.e. the date when the 2012 Regulation takes effect) its shareholders were a foreign bank and a bank in Indonesia.

 

3. Merger, Bank Holding Company or Holding Function

 

  • A party which already controls more than one bank, or which acquires a bank which will result in that party controlling more than one bank, must comply with the single presence policy by:
    • (a) undertaking a merger or consolidation of the banks controlled by that party;
    • (b) forming a Bank Holding Company (for this purpose, a Bank Holding Company is defined as a legal entity incorporated in Indonesia which is formed and/or owned by the Controlling Shareholder for the purpose of consolidating and directly controlling all the activities of the banks which are its subsidiaries); or
    • (c) forming a Holding Function (for this purpose, Holding Function is defined as the function of a Controlling Shareholder (where the Controlling Shareholder in question is an Indonesian bank or the Government of Indonesia) of consolidating and directly controlling all the activities of the bank which are its subsidiaries).
  • Under the 2006 Regulation, the option of forming a Bank Holding Company only applied to a party which already controlled more than one bank on the effective date of the 2006 Regulation. The 2012 Regulation has widened the scope of the Bank Holding Company exemption to cover the new acquisition of a bank which results in a party controlling more than one bank.

 

4. Timing for Compliance

 

  • The requirements for compliance with the single presence policy as set out in paragraph 3, bullet point 1, (a) and (b) above must be carried out within one year of:
    • (a) 26 December 2012 (i.e. the date when the 2012 Regulation takes effect), in the case where a party is already a Controlling Shareholder of more than one bank;
    • (b) completion of the acquisition of the shares in another bank, in the case where such acquisition results in a party becoming a Controlling Shareholder of more than one bank.
    • • The requirement for compliance with the single presence policy as set out in paragraph 3, bullet point 1, (c) above must be carried out within six months of each of the events set out in paragraph 4, bullet point 1 above (as the case may be).
  • BI may extend, in its discretion, the deadlines set out in paragraph 4, bullet points 1 and 2 above, in circumstances where in BI’s assessment the difficulties encountered by the Controlling Shareholder and/or the banks controlled by it are of such complexity that an extension is justified.

 

5. Merger Incentives

 

  • To encourage banking sector consolidation, BI is offering certain incentives for bank mergers. A bank which undertakes a merger or consolidation will be provided various incentives in the form of:
    • (a) temporary relaxation of compliance with prescribed Minimum Statutory Reserve requirement for banks (“Giro Wajib Minimum” (GWM));
    • (b) time extension in relation to curing any Legal Lending Limit requirement for banks which has been exceeded;
    • (c) ease of opening branches; and/or
    • (d) temporary relaxation of application of Good Corporate Governance (GCG) principles.

 

The above incentives will be granted by BI in accordance with the existing BI Regulation No. 8/17/PBI/2006 on Incentives for Banking Consolidation.

 

6. Bank Holding Company

 

  • A Bank Holding Company must be in the form of a limited liability company incorporated in Indonesia and must comply with applicable laws in Indonesia. A qualifying Bank Holding Company can only carry out the activity of equity participation, which includes providing management services in order to increase the effectiveness of consolidation, business strategy and optimizing the finances of the group which is being controlled.
  • The Bank Holding Company must be one level above the banks which are directly controlled by it. 
  • BI will regulate and supervise the Bank Holding Company as part of BI’s banking regulatory and supervisory function. The regulatory approval requirements for setting up a Bank Holding Company are, however, not yet clear.
  • A Bank Holding Company can exist alone as a legal entity or be a Financial Holding Company which consolidates the financial institutions owned by the Controlling Shareholder. 
  • Any transfer of shares from a Controlling Shareholder of a bank to the Bank Holding Company may be exempted from BI’s bank acquisition procedure. 
  • BI will apply its “fit and proper test”, as applicable to banks, to management candidates for any Bank Holding Company.

 

7. Holding Function

 

 

  • The Holding Function can only be carried out by a Controlling Shareholder where the Controlling Shareholder is a bank which is an Indonesian legal entity or an agency of the Government of Indonesia.
  • The Holding Function must be led by:
  • (a) one of the directors of the bank which is the Controlling Shareholder; or

  • (b) an official appointed by the highest authority within the relevant agency of the Government of Indonesia.

  • It remains unclear whether BI will relax the Legal Lending Limit requirements applicable to banks as they relate to theirequity participation in a subsidiary bank.
  • Both a Bank Holding Company and a bank which carries out a Holding Function must provide strategic direction to, and consolidate the financial reports of, the banks which are its subsidiaries. BI will regulate both Bank Holding Companies and banks which carry out a Holding Function.

 

8. Implementation

 

  •  Banks with the same Controlling Shareholder must produce a plan to comply with the single presence policy and submit the plan to BI within 3 months of 26 December 2012 (i.e. the date when the 2012 Regulation takes effect). Such banks must report to BI quarterly on implementation of the compliance plan.
  • A bank which is to be acquired by a party which is already a Controlling Shareholder of another bank must submit to BI a plan (to comply with the single presence policy) at the same time as submitting the request for BI’s approval of the acquisition.
  • The compliance plan submitted to BI must include at least the method chosen (to comply with the single presence policy), an action plan and time table for its implementation. The plan can be prepared and presented separately by each of the relevant banks or by the relevant banks (with the same Controlling Shareholder) together, and must be signed by the directors and commissioners of each bank, and made known to the Controlling Shareholder.

 

9. Non-compliance

 

 

  • A Controlling Shareholder which fails to comply with the single presence policy is prohibited from controlling, and is prohibited from owning, more than 10% of voting shares in each of the relevant banks. Correspondingly, in a generalmeeting of shareholders, the banks in question can only register at most 10% of the total voting shares of the relevant bank as being held by the non-compliant Controlling Shareholder. Any shares above 10% held by the Controlling Shareholder will be treated as shares with no voting rights until such time as those shares are sold to another party. A bank which fails to comply with this requirement will be subject to a fine of IDR 500 million, and/or to a down grade in its GCG rating.
  • A non-compliant Controlling Shareholder which fails to comply with the single presence policy, must sell shares held by it in the bank, which are in excess of the permitted 10%, to another party within one year of the deadline set out in paragraph 4, bullet points 1 and 2 above. A non-compliant Controlling Shareholder which fails to do so, will be prohibited from becoming a Controlling Shareholder of any bank in Indonesia for 20 years.

 

10. Observations

 

  • The key difference between the 2006 Regulation and the 2012 Regulation is that under the 2006 Regulation, the option of forming a Bank Holding Company only applied to a party which already controlled more than one bank on the effective date of the 2006 Regulation and so had become of limited application in practice. The 2012 Regulation has widened the scope of the Bank Holding Company option to cover new acquisitions of a bank which results in a party controlling more than one bank.
  • The 2012 Regulation has also introduced the new concept of a bank (which is an Indonesian legal entity) performing “Holding Functions”. This concept was absent from the 2006 Regulation, and is now available as a further alternative way, to either undertaking a merger / consolidation or forming a Bank Holding Company, of complying with the single presence policy.
  • The introduction of further flexibility in BI’s single presence policy is a welcomed development as it serves to widen the options available to parties controlling more than one bank in Indonesia, and may hence help facilitate the consolidation of the banking sector in Indonesia.

 

 

For further information, please contact:

 
David Dawborn, Partner, Herbert Smith Freehills
david.dawborn@hsf.com
 
Haydn Dare, Partner, Herbert Smith Freehills
haydn.dare@hsf.com
 
Iril Hiswara, Partner, Herbert Smith Freehills
iril.hiswara@hbtlaw.com
 
Adrian Cornellius Pranata, Herbert Smith Freehills
cornellius.adrian@hbtlaw.com
 
Vik Tang, Herbert Smith Freehills
vik.tang@hsf.com
 

 

 
 
 
 

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